Substantive Consolidation [Bankruptcy] Law and Legal Definition

Substantive consolidation is the pooling of assets and liabilities of two or more related debtors into a single big pool to pay creditors. Substantive consolidation involves both harm and benefit to creditors. Through substantive consolidation a debtor is essentially simplifying the process of settling his/her creditors.

In In re Garden Ridge Corp., 2010 U.S. App. LEXIS 14024, 2-3 (3d Cir. 2010), the court observed that substantive consolidation "treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities."

Again in In re Permian Producers Drilling, Inc., 263 B.R. 510 (D. Tex. 2000), the court held that a bankruptcy court has the authority to order substantive consolidation. The question whether circumstances of a case warrants substantive consolidation of debtors is a highly fact specific analysis that must be made on case-by-case basis. Under the elements test the existence of a combination of elements showing a strong relationship among the debtors is a prerequisite for substantive consolidation. The substantial relationship must also be coupled with additional elements such as commingling of separate assets and liability so as to make it prohibitively expensive or difficult to sort out the proper assignment and ownership of the assets and liabilities.